Accruing items such as workers’ compensation (WC) and general liability (GL) insurance can be confusing due to rate changes, various time frames that the polices cover, worker classifications, and more. Luckily accounting software specific for the construction industry can help ease the burden of manually calculating and accruing for the burdens that are common in the field. The following insights will help you record and accrue WC and GL insurance on an accurate and consistent basis.
When do you update your rates?
The beginning of your insurance renewal period is the perfect time to update and double check that you are accurately accruing WC and GL expenses as the costs are incurred.
Each year when you receive your new rates from your insurance provider, update these rates in your accounting software.
Why is accruing WC and GL important?
Not updating these rates can result in over or under accruing your WC or GL accrual. These accruals typically post based on labor hours on each job, so if you are accruing these rates incorrectly this can affect the costs associated with each job. This can also lead to a large adjustment at the end of the year.
What is the purpose of accruals?
Each time you run payroll, you are posting labor to specific jobs and your system is automatically accruing labor burden, including workers compensation and general liability.
The accountant in me finds it easiest to think in terms of debits and credits. Listed below is the journal entry your accounting software is posting with each payroll:
Debit Job Costs – Labor Burden (WC and GL)
Credit Accrued Liabilities – Workers Compensation
Credit Accrued Liabilities – General Liability
Most companies do not pay WC or GL based on actual hours but pay invoices throughout the year based on an estimated amount. Because the invoices that are paid throughout the year typically are not based on actual labor hours, there is a resulting balance either in prepaid or accrued workers compensation and general liability.
At the end of your insurance coverage period, an audit is conducted to determine what the actual amount of WC and GL should have been. Companies will receive a refund, or a bill based on whether they over or under paid during the year. In a perfect world if your WC and GL rates are being accrued appropriately and the payments for WC and GL are being posted against the accrual; then the amount remaining in your balance sheet account is either the additional amount owed, or the refund anticipated.
Since these accruals are estimates, it is difficult to accrue these exactly, but if you are using the correct rates, your adjustment will be immaterial to your financials. It is also important to check for reasonableness. If labor is up, the expense and accrual will also be higher, and the account will show an amount due. If labor is down, the expense and accrual will be lower than the prior year, and the account will show a refund is due to the company.
Appropriately accruing workers' compensation and general liability is important to have accurate costs associated with each job and prevent large adjustments at the end of the year. The experts at MarksNelson can help your construction firm navigate the nuances of your financials. Reach out to us today.
